UT’s president favors ‘aggressive and vigilant’ boards, just not over himself
ENRON: The Enron Complex in downtown Houston
By Jon Cassidy | Watchdog.org
HOUSTON — First, there was the letter from a whistleblower, claiming the institution’s accounting was crooked.
Some of the institution’s employees also worked for a related entity, and were well compensated there, which created a conflict of interest.
An investigation was ordered, just a preliminary one, to see if a full investigation was needed. The investigators, however, concluded the rules “were generally adhered to” and the transactions “were uniformly approved by… professionals as well as the Chief Accounting and Risk Officers.” Since “nobody has reason to believe that (the accounting) is inappropriate,” there was no need for a “further widespread investigation,” the investigators concluded, although they admitted “bad cosmetics.”
Later, after the catastrophe, the problem with the first inquiry was obvious. The result “was largely predetermined by the scope and nature” of a preliminary inquiry. The cheating had been buried deep, and only showed up “after a detailed examination.”
The first, easygoing investigators “spoke only with very senior people” who “with few exceptions, had substantial professional and personal stakes in the matters under review.”
Six weeks after that first inquiry, the institution declared bankruptcy amid the biggest scandal in a generation: the collapse of Enron.
The man tasked with investigating what went wrong was William J. Powers, then dean of the law school at the University of Texas, and now the university’s president.
While the parallels between Enron and the present admissions scandal at UT Law might be interesting, there’s no reason for us to impose an interpretation on those events. Powers has already written about what he learned regarding the role of a board of directors in preventing fraud.
Powers’ allies, of course, now accuse Wallace Hall, a member of the University of Texas’ board, of overstepping his role as a regent, of “micromanaging” Powers, of engaging in a “witch hunt.” Hall is facing impeachment and even possible jail time for imposing on the university’s record-keepers with his “unreasonably burdensome, wasteful, and intrusive requests for information,” as the official report put it.
The Bill Powers of 12 years ago would have cheered Hall on. At Enron, he wrote, “the Board of Directors failed, in our judgment, in its oversight duties. This had serious consequences for Enron, its employees, and its shareholders.”
The board, he wrote, “cannot be faulted for the various instances in which it was apparently denied important information concerning certain of the transactions in question. However, it can and should be faulted for failing to demand more information, and for failing to probe and understand the information that did come to it.”
Powers acknowledged executives hid multiple key facts from the board, and this “severely hampered” the board, yet the board was still at fault for conducting cursory reviews.
“These reviews were a significant part of the control structure, and should have been more than just another brief item on the agenda,” Powers wrote. “Instead, these reviews appear to have been too brief, too limited in scope, and too superficial to serve their intended function…. In sum, the Board did not effectively meet its obligation…”
One of the four accusations against Hall is that he embarrassed the school by insisting UT stop inflating its fundraising figures, and adhere to national financial reporting standards. The Powers of 2002 would have approved, writing that even when “internal accountants and (the accounting firm) Andersen had fully evaluated and approved the accounting… there was nevertheless an opportunity for the members of the Board to identify flaws and pursue open questions.”
“The Board, and in particular the Audit and Compliance Committee, has the duty of ultimate oversight over the Company’s financial reporting,” he wrote. “While the primary responsibility for the financial reporting abuses discussed in the Report lies with Management, the participating members of this Committee believe those abuses could and should have been prevented or detected at an earlier time had the Board been more aggressive and vigilant.”
Sen. Kirk Watson, D-Austin, among many others, has attacked Hall for conducting investigations independent of collective board action. Only the whole board should be able to authorize or delegate someone to investigate an issue such as favoritism in admissions, Watson said last year. “The regent ought to have to come to the board. The board ought to have to take action on whether it’s going to go forward with that kind of thing.”
Regent Bobby Stillwell has also said he’s “been opposed to these individual investigative undertakings.”
In this view, the board delegates any fact-finding to others, who bring back reports. Powers, however, thought board members shouldn’t just accept the assurances of accountants and executives.
“The Board was entitled to rely on assurances it received that Enron’s internal accountants and Andersen had fully evaluated and approved the accounting treatment of the transaction, but there was nevertheless an opportunity for the members of the Board to identify flaws and pursue open questions,” Powers wrote.
And on it goes — “the Board does not appear to have considered the need…” for this or that. Where there was a conflict of interest, the “Board substantially underestimated the severity of the conflict and overestimated the degree to which management controls and procedures could contain the problem.” The “Board had an obligation to give careful attention to the transactions that followed. It failed to do this.” And “each of these elements should have been the subject of detailed questioning that might have led the Finance Committee or the Board to discover the fundamental flaws…”
The details of Enron’s chicanery aren’t so important any more, other than the fact they were enormously complex, far more difficult to grasp at a glance than anything UT’s board sees. Yet Powers still thought board members should have dug in.
One of Enron’s tricks for hiding debt called “Raptor was an extremely complex transaction, presented to the Committee by advocates who conveyed confidence and assurance that the proposal was in Enron’s best interests, and that it was in compliance with legal and accounting rules,” Powers wrote. “Nevertheless, this was a proposal that deserved closer and more critical examination.”
In contrast with Powers’ view of vigorous board oversight, a legislative committee conducting an inquisition against Hall invited two witnesses last December to offer a much more constricted view of what board members ought to do. Former UT board members Scott Caven and John Barnhill testified that a board’s duty was to decide a few big issues and get out of the way.
“The most general statement I can make is that the obligation of the board is to set policy,” Caven said. Barnhill added that the board has “the very strong responsibility of having to hire the various presidents of all the institutions and… you know, a lot of other responsibilities. But that sticks out in my mind as one of the big ones.”
“We’re an oversight committee hiring the chancellor to basically have the day-to-day contact with the various presidents,” Barnhill said. “And our primary role is to set policy that the chancellor follows and the president follows.”
“How did you operate in terms of whether or not individual regents would go off on their own investigative routines?” the committee’s attorney, Rusty Hardin, asked.
“It would have been inappropriate for a regent to act independently of the board,” Caven said. “The board is a board for a reason, and that is to discuss issues and make decisions and move forward on those decisions. Any regent acting independently of that would be more of a maverick if he was operating on his own.”
Barnhill agreed it would be inappropriate, adding “it wouldn’t be anything but disruptive.”
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